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Government unlikely to appeal against Bombay HC decisions in Vodafone, Shell transfer pricing cases
December, 01st 2014

India is unlikely to appeal against decisions by the Bombay High Court in the Shell and Vodafone transfer pricing cases as the Narendra Modi government looks to send out a strong signal that it's abiding by a pledge to put in place a non-adversarial tax regime and restore the country's appeal as a destination for investors.

"The Bombay HC judgement is very clear," said a top finance ministry official, indicating that appeals may not be filed against the rulings. Attorney-General Mukul Rohatgi has also advised the government not to appeal against the rulings, backing the view that such a move would further tarnish the country's image among investors. "The Bombay High Court judgements are correct," Rohatgi said in his opinion forwarded to the government.

"Money realised by transfer of shares cannot be deemed as income," he said. His views concurred with those expressed by some income tax department officials and the Central Board of Direct Taxes (CBDT) chairperson, an official said. "Due regard has to be given to the views of the officer that we have to look at the investment climate," this person said.

Among the companies that could benefit if the government doesn't appeal against the verdicts are IBM, Nokia, Cairn India and Leighton India. The high court verdict in the Shell case had questioned the rationale of the Rs 18,000-crore transfer pricing order imposed on the Anglo-Dutch multinational. Many officials in the tax department had reservations about the transfer pricing order when it was first passed in 2013.

Avoiding an appeal would provide clarity to tax authorities and also shield many other companies from such demands.
Taking a step in this direction, CBDT has already directed income tax field offices to ensure that appeals are only filed if cases have merit and not merely based on the tax effect involved. Adverse comments by tribunals and courts against frivolous appeals have also been highlighted in the communique to officials.

The order against Shell had evoked strong reactions from domestic and international investors, with some dubbing it 'tax terrorism', a term that came to be identified with the previous UPA regime. The new government is committed to turning this around as it looks to make India a destination for much-needed investment that's required to fuel growth.

"Unsustainable demands won't get you taxes," finance minister Arun Jaitley had said soon after the Bombay High Court verdict at a media event. "Unsustainable demands in the books can show you in good glory, but eventually those taxes will be blocked in some judicial court proceedings... They would have only earned us a bad name as an investment destination."

Experts concur with this view and cautioned that appealing against the Bombay High Court judgements would be detrimental to business sentiment. "This judgements bring much-needed relief to global investors and will instill confidence about the improving business climate in India. However, in case CBDT decides to pursue an appeal with the Supreme Court, the relief can be short lived," said Suresh Surana, founder, RSM Astute Consulting Group.

The Bombay High Court had ruled in favour of Vodafone saying that the British telecom giant was not liable to pay Rs 3,200 crore demanded by the tax department in a transfer pricing case. The tax authorities had charged Vodafone India additional income tax alleging that it had undervalued its shares in subsidiary Vodafone India Services while transferring them to its parent company in Britain. The transaction took place in 2010 financial year.

The department had first sought the opinion of the solicitor general who is believed to have advised the government to appeal against the rulings rather than lose out on tax revenue. But the finance ministry then sought a further clarification from Rohatgi. Shell India had issued shares to parent Shell Gas BV at Rs 10 apiece in the 2008-09 financial year. The tax department contested this valuation and estimated it at Rs 183 per share. The difference resulting from the revaluation of shares was treated as income in the hands of Shell India.

The Bombay High Court struck down the income tax department's order saying the issue of shares by Shell India did not result in income in its hands and the difference in the purported valuation as derived by the transfer pricing officer is not covered by regulations in India and is therefore not subject to tax.

Transfer pricing refers to the pricing of assets, tangible and intangible, services and funds moved within an organisation in a cross-border deal. Tax administrations apply stringent rules to prevent transfer of income from hightax jurisdictions to low-tax jurisdictions to escape levies.

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